Where Worlds Collide

My group at Cisco works on mobile Internet products, so I follow the news in this area closely. A common theme is the stresses that arise along the boundary between two business models: that of the mobile industry and that of the Internet industry. Analogies that come to mind are crystal grain boundaries (I live in Silicon Valley) or platectonic boundaries (near the San Andreas fault ), regions of dislocation and instability. While some might argue about which business model is superior, a more useful observation is that both have proved fabulously successful, even though each is aligned differently. As these two successful industries increasingly intersect, their distinct directions drive many news stories and trends we observe.I think of the Internet as aligned “horizontally,” with a multitude of players adding value in distinct layers, with competition and partnering happening around de facto standards. For Cisco, the most important standard is the Internet protocol (IP), which allows many kinds of information (web pages, MP3 files, phone calls, YouTube videos) to flow over many kinds of links (Ethernet, phone lines, WiFi). The broader Internet has many such standards, including HTML, Flash, BIOS, PCI-e, and so forth. Because of this variety, new players emerge easily and evolution happens rapidly. While this change and innovation create a vibrant and stimulating industry, they also cause some chaos as a byproduct.Meanwhile, I think of the mobile industry as aligned “vertically,” with fewer players taking on larger roles. The small number of spectrum licenses constrains the number of mobile operators (compared to the explosion of Internet service providers), while the rapid growth of mobile networks developed a small set of highly integrated equipment providers. Despite many standards, the radio interface between handsets and base stations is the main focus of interoperability, and even there, operators choose the handsets they offer their subscribers. One could lapse into polemics that this approach is “too closed,” but by constraining chaos, the mobile industry has reached the largest scale of any communications technology around the world.Enough theory, time for an example. In February 2007, Skype (now part of eBay) petitioned the FCC to declare that the 1968 Carterfone decision applies to mobile networks. Just as Carterfone allows connecting any non-damaging device to the public telephone network, Skype would like to connect any compliant device to mobile networks, even if operators object. (Currently, the operators alone decide what devices may connect.) Presumably, Skype would like to create a device that carries voice-over-IP phone calls, mobilizing their existing PC-based service, leaving the operators just to shuttle IP packets. Also presumably, the operators would prefer to maintain control over all voice calls on their networks.Each side of this argument cites logic from their respective worlds. In their petition, Skype recalls the wonderful innovation that the open Internet has brought forth, adding “in stark contrast to open development standards that exist on the Internet, wireless carriers have exerted control over devices as well as the mobile operating systems upon which they run.” They cite Columbia Law professor Tim Wu, whose corroborating paper on “wireless net neutrality” was conveniently published less than a week earlier. Meanwhile, the CTIA mobile industry group responded with warnings of the chaos that such unconstrained choice would unleash, claiming “the entire network suffers, [by] subjecting all wireless users to the experimentation of the few subscribers interested in alternative devices…”Who’s right? Some mobile operators have disabled features they find threatening, including voice-over-IP, WiFi, and some Bluetooth profiles. But opening the Pandora’s box of government intervention is a blunt weapon to brandish. As Senator John Sununu (R-New Hampshire) emphasized at a recent CTIA gathering, Carterfone was imposed when the Bell System enjoyed a strong, government-supported monopoly. The mobile industry is much more competitive, and the forces of competition seem likely to generate attractive consumer choices.The recent Apple iPhone introduction gives good evidence of the power of competition. Apple took advantage of its enormously popular iPod to negotiate an agreement with AT&T Wireless allowing them unprecedented control of the mobile device, its software, and even the split of revenues. In exchange, AT&T Wireless enjoys a period of exclusivity to offer the iPhone, encouraging existing customers to renew contracts and prompting customers of other operators to switch to AT&T. Real innovation, in both technology and business model, with no government intervention at all. And an example of the intriguing shifts along the boundary between the mobile industry and the Internet.

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